George Osborne is using world events to fit his rhetoric of doom. But the real lesson from Cyprus is about banking, not debt
As the chorus of voices demanding a change of course from our chancellor continues to grow, in both size and intensity, Treasury sources are preparing the nation for yet another round of the familiar refrain "we are having to make difficult decisions"; the implication being that the difficulty of a decision is a self-evident indication of its virtue.
In this climate, George Osborne is increasingly looking for straws to grasp; the latest is the situation in Cyprus. "That is an example in Cyprus of what happens if you don't show the world that you can pay your way," he declared on The Andrew Marr Show on Sunday morning. The comments were described as "sheer nonsense" by Business Insider.
Cyprus could not be more different to the UK, in every conceivable way, even putting aside the manifest disparities in size, mix and nature of economic activity. Cyprus boasts a GDP more than 100 times smaller than the UK; its economy is heavily reliant on tourism and so naturally more susceptible to instability in the Middle East; it is also a net importer by a factor of one to four.
While Cyprus's debt to GDP ratio is broadly comparable to that of the UK, in absolute terms this translates to under £12,000 per citizen in Cyprus compared to over £18,500 in the UK. Cyprus is also running a much lower deficit than the UK, both budget and structural. Therefore, the debt in the UK is growing at a faster rate.
The UK shares none of the key catalysts which have exposed Cyprus to the banking crisis either. Cypriot banks were heavily exposed to Greek debt – they were essentially the very next domino in that row. Over a quarter of the country's exports are to Greece. Finally, Cyprus suffered a massive economic shock in the summer of 2011 (a key point on the Greek timeline of events) – the explosion at Evangelos Florakis naval base, which destroyed an important port, as well as the biggest power station on the island. This is estimated to have cost the country over 13% of its GDP.
In addition, Cyprus has recently discovered enough gas reserves to sustain the country's energy needs for over two centuries. Some believe the battle over rights for these reserves is really at the centre of the EU-Russia standoff. This is in sharp contrast to the situation in the UK, where depleting North Sea oil will increasingly expose the UK to rising energy prices.
Most importantly, perhaps, Cyprus is part of the eurozone and so does not have access to the monetary levers which the UK does. Recently both Paul Krugman and Martin Wolf have thoroughly demolished the idea that the UK enjoys low interest rates because of its policy of austerity and have identified precisely that being in charge of those levers is the key to market confidence.
This is yet another symptom of a lack of evidence-based policy. There is a pick-and-mix approach to both domestic and international events in order to justify ideologically predetermined policies. The AAA rating is vital while we have it and irrelevant when we lose it. Any economic woes from 2008 to 2010 are entirely the fault of the previous administration, while any since then are exclusively down to international events. Growth may be stagnant, but questionable employment figures prove that we are heading in the right direction. Iceland, which nationalised problem banks, prosecuted some of the people responsible and wrote down private debt, thus injecting money into its economy, is too small and too different to point to solutions. But Cyprus – equally small and different – is a cautionary tale to justify further austerity.
This is the paradox at the core of Osborne's approach. At a time when the central issue causing economic stagnation continues to be the lack of demand, which is directly related to confidence, he persists with the rhetoric of doom, declaring we are but a step away from becoming Greece, Spain or Cyprus, which can only have the effect of scaring the economy stiff.
If there is a general lesson to be learned from Cyprus, it is that an overdeveloped, dominant finance sector exposes a country to volatility. If anything Cyprus is now a microcosm of what happened in the UK in 2008. And, considering Osborne's rejection of a financial transaction tax and his defence of bankers' bonuses in Brussels, this is a lesson which he does not want to learn. Instead the government boasts about turning the UK into a tax haven and we lurch as a nation, blindfolded, toward the next crisis.
"Is any of you impressed by George Osborne?" asked Jeremy Paxman of the Newsnight panel of economic experts, assembled to discuss policy on the eve of the budget. An awkward silence followed as economists and business leaders looked at each other mutely. "I feel sorry for him in a sense," eventually the FT's Gillian Tett offered.
I feel sorry for us.
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